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USD poised ahead of Fed Chair's speech

Published: Monday 06 June 2016

Janet Yellen speaks to the World Affairs Council of Philadelphia today. Everyone is desperate to hear what she has to say about US interest rates in the wake of Friday's very poor US jobs data. The US added just 38,000 jobs in May; barely a quarter of most analysts’ forecasts and the US Dollar weakened on the news. It would be hard for the Fed to argue for an interest rate hike in that environment but a September hike is, many believe, still on the cards. Whether Mrs Yellen will pull the rug from under that argument is a moot point at this stage but all will be revealed very soon.

The GBPUSD rate is back to where it started before the US employment report but that is very clearly a Sterling issue. There is a growing feeling that the 'Leave' campaign is gaining momentum with regard to the EU referendum. That is weakening the Pound as uncertainty weakens everything in financial markets. Most Sterling related exchange rates have dived over the weekend and gaps between the closing price on Friday and the high on Monday have appeared. Traders will tend to follow the charts and a spike to €1.2760 is highly likely as well as spikes to AUD 1.9690 and CAD1.8750 are to be expected.

Other than Janet Yellen's speech, there are a couple of ECB speakers today but not much in the way of hard data. We will get an interest rate decision from the Reserve Bank of Australia overnight tonight. There isn't an obvious plan to cut the base rate after some more encouraging Australian Data. The Aussie Dollar is likely to be lively ahead of that announcement though, so that bounce in the GBPAUD rate mentioned above, is likely to happen today.

The Reserve Bank of New Zealand is expected to cut the NZ base rate on Wednesday evening (UK time). The current rate of 2.25% is expected to be cut by 25 basis points to 2.0% and the NZ Dollar, which has been remarkably strong of late, will give up some of its strength as we near that announcement and lose more if the cut goes ahead. NZD sellers may be in the midst of an opportunity right now.

Away from the markets, you have probably all heard of the Heimlich Manoeuvre, used by countless numbers of people to help choking diners. Well the man who created the technique, Dr Henry Heimlich finally got a chance to use the skill in real life when he saved a choking 87 year old woman who is a resident in his own retirement home. Dr Heimlich is himself 96 and, whilst he has demonstrated his life saving manoeuvre many times over the 42 years since he invented it, this is his first real life emergency deployment. Good on him.

Hypothesis v reality

A 16 year old boy says to his dad, "I have to write something for school which explains the difference between hypothesis and reality. I'm stuck."

"Well let me explain," says the father. He turns to his wife and says, "Honey, would you sleep with Tom Cruise for a million quid?"

"Oh yes," says his wife, without a second's thought, before blushing and turning away.

He turns to his daughter and asks the same question.

"Daddy!" she says, shocked by the question. "I'm only 18 but yeah I probably would, "she says, "He's a bit old for me but he's still hot."

"So you see," says the father, turning back to his son. "Hypothetically we are in the company of two potential millionaires but in reality we are just living with a couple of tramps."

AUD

The Sterling – Australian Dollar rate is in the middle of a very mixed picture. We are awaiting the Reserve Bank of Australia's meeting assuming no interest rate cut is likely but the statement accompanying the decision will be the key to the direction of the AUD over the coming week. Once that is 'out there,' the markets will focus on this data plus Australian inflation expectations until the weekend when Australia's number one export market, China, publishes their industrial production data. This has been a slowing statistic with implications for Australia's exporters, so anything with a hint of the positive about it will be seized upon by AUD buyers.

CAD

The USD weakened after Friday's poor employment report but we saw the weakness of the Pound override that effect in the GBPCAD exchange rate and this pair fell throughout last week. A small scale recovery in oil and energy prices boosted the CAD; turning the May rally into a June rout. The fall from C$ 1.93 to C$ 1.86 has happened in a matter of just 8 working days and there appears to be scope for further falls in this GBPCAD exchange rate. The Pound is being battered by an apparent rise in the numbers expected to vote to leave the EU on June 23rd and the global commodity market appears to be regaining some composure after a very turbulent time. It wouldn't be a surprise to see C$1.84 in the near future.

EUR

The Sterling - Euro exchange rate had started to mount a rally in April and that rally sort of ran out of steam by the end of May. And, having topped out at €1.32, this pair proceeded to reflect the increasing confidence of the 'Leave' campaign and slid all the way to the current €1.27 level. This is the midway point between the April low and the May high, so it is a bit of a magnet for chartists and could well prove to be the pivotal point in the Pound's correction. It is slightly pointless to try to predict accurate movements in the GBPEUR rate at the moment because every new poll, every political grandstand and every snippet of pro or anti EU propaganda will cause a reaction. Suffice to say, we are in a range between €1.26 and €1.32 at the moment. That could move to a €1.23 to €1.2850 range without too much effort and we need to be careful because, if the UK does vote to leave the EU, we could see levels below €1.20 in very short order.

NZD

There is a strong likelihood the Reserve Bank of New Zealand will vote to cut the NZ base rate to 2.0% when they meet this week. Worries over the demand from China and some domestic fears are keeping things quite edgy for the RBNZ. That plus the perilous state of the global economy and frustratingly low commodity prices are keeping the NZ economy on the back foot. However, the weakness of the Pound and relatively high interest rates in NZ are still maintaining demand for the Kiwi Dollar and we have seen the GBPNZD rate fall from NZ$2.20 at the end of May to NZ$2.07 today. The crucial level for this pair is NZ$2.03. A break below there would pull this pair back into the range it occupied from September until it broke in April. With the EU referendum vote in the UK just 17 days away, I would be baffled if the Pound didn't weaken further in the interim. Be careful if you are a NZD buyer.

USD

The poor growth in non-farm payrolls reported on Friday (just 38,000) was only part of the story. The US unemployment rate dropped from 5.0% to just 4.7% and, on the face of it, that is good news but the measure is of those seeing work. If you include the number of Americans who have just stopped bothering to seek the jobs that aren't there, the unemployment rate is more like 9% and that is a really tough figure for the US economy to handle. As a result, Janet Yellen (the chairwoman of the Federal Reserve) will almost certainly shrug off any hint of a June rate hike and may even poo-pooh a 2016 hike of any sort when she speaks today. That would weaken the USD again and a GBPUSD rate of $1.47 is probably on the cards if she does. If not; she could still hold out the glimmer of an earlier hike then we can expect the USD, which weathered Friday's storm rather well in my humble opinion, to strengthen and $1.42 in the GBPUSD rate is a possibility. Expect a bumpy week ahead either way.